Basis Capital Swap Deal Is Australian, Can't Sue in U.S., Goldman Says

Basis Capital, an Australian hedge fund suing Goldman Sachs Group Inc. for $1 billion for losses related to credit default swaps, made the deal in Australia and can’t sue in the U.S., Goldman Sachs said.

Basis never contends it “did anything within the United States in relation to the transaction,” Goldman Sachs said in a Sept. 1 filing in Manhattan federal court, urging the judge to throw out the lawsuit. “The purchase and sale occurred only when both parties agreed to the terms of the transaction” and Basis executed those documents in Australia, Goldman Sachs said.

The lawsuit by Basis Capital’s Basis Yield Alpha Fund focuses on Goldman Sachs’s sale of the “Timberwolf” collateralized debt obligation. The complaint, filed June 9, says the fund was forced into insolvency after buying mortgage- linked securities created by Goldman Sachs, in what one of its own executives described internally as a “shi**y deal.”

Goldman Sachs, based in New York, again urged District Judge Barbara Jones to throw out the suit, citing a June U.S. Supreme Court ruling known as “Morrison” that said U.S. securities laws don’t apply to the claims of foreign buyers of non-U.S. securities on foreign exchanges.

“Goldman’s thesis, if adopted, would render the U.S. securities laws a nullity any time a U.S. seller engages in fraud in effecting the sale of a security to a foreign purchaser,” Basis said in papers filed Aug. 24.

False Claim

In the complaint, Basis alleged Goldman Sachs falsely claimed in June 2007 that the market for investments such as Timberwolf had stabilized. Basis claims it closed on its deal with Goldman Sachs to buy credit default swaps tied to Timberwolf at the same time Thomas Montag, Goldman Sachs’s former head of sales and trading for the Americas, sent the e- mail calling the Timberwolf CDO “one shi**y deal.”

The credit-default swaps in the transaction were derivatives of U.S. securities, Basis said. The location of the transaction was really New York, and Goldman Sachs International was acting as an agent of Goldman Sachs Group Inc. in the transaction, the company said.

Basis passed on an opportunity to buy Timberwolf notes and instead entered into a private credit default swap, Goldman Sachs said.

Basis “does not dispute that it negotiated and agreed to the transaction in Australia,” Goldman Sachs said.

The case is Basis Yield v. Goldman Sachs, 1:10-cv-04537, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Joe Schneider in Sydney at jschneider5@bloomberg.net

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